No. 06-659

WILSON-EPES PRINTING CO., INC. – (202) 789-0096 –WASHINGTON, D. C. 20001

IN THE

Supreme Court of the United States————

COLTEC INDUSTRIES, INC.,Petitioner,

v.

UNITED STATES OF AMERICA,Respondent.

————On Petition for Writ of Certiorari to the

United States Court of Appealsfor the Federal Circuit

————BRIEF AMICI CURIAE OF THE NATIONAL

ASSOCIATION OF MANUFACTURERS ANDTHE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICAIN SUPPORT OF PETITIONER

————

JAN S. AMUNDSONSenior Vice President &

General CounselQUENTIN RIEGELVice President &

Deputy General CounselNATIONAL ASSOCIATION OF

MANUFACTURERS1331 Pennsylvania Avenue N.W.Washington, D.C. 20004-1790(202) 637-3000

ROBIN S. CONRADAMAR D. SARWALNATIONAL CHAMBER

LITIGATION CENTER, INC.1615 H Street, N.W.Washington, D.C. 20062(202) 463-5337

PETER B. RUTLEDGECounsel of Record

127 Moncure DriveAlexandria, VA 22314(202) 319-5140

Counsel for Amici Curiae

(i)

QUESTIONS PRESENTED

1. In determining that a transaction may be disregardedfor tax purposes, should a federal court of appeals review thetrial court’s findings that the transaction had economic substance de novo (as three courts of appeals have held), orfor clear error (as five courts of appeals have held)?

2. Where a taxpayer made a good-faith business judg-ment that the transaction served its economic interests, andwould have executed the transaction regardless of the taxbenefits, did the court of appeals (in acknowledged conflictwith the rule of other circuits) properly deny the favorable taxtreatment afforded by the Internal Revenue Code to thetransaction based solely on the court’s “objective” conclusion that a narrow part of the transaction lacked economic benefitsfor the taxpayer?

(iii)

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ......................................... i

TABLE OF AUTHORITIES......................................... v

INTEREST OF AMICI CURIAE ................................... 1

SUMMARY OF THE ARGUMENT............................ 2

I. THE DECISION BELOW THWARTSLONGSTANDING AND IMPORTANTPRINCIPLES OF JUDICIAL DEFERENCETO BUSINESS JUDGMENT ........................... 3

A. American Company Law Reflects A Tra-dition Of Deference To Business Judgment ... 3

B. The Federal Circuit’s Economic Substance Analysis Undercuts This Tradition ofDeference..................................................... 4

1. The decision below sows confusionover the meaning of various judiciallycreated doctrines governing the avail-ability of deductions and credits underthe Internal Revenue Code .................... 4

2. The lower court’s standard for eco-nomic substance determinations virtu-ally guarantees judicial second-guessingof good-faith business judgments ........... 7

3. The Federal Circuit’s division of a transaction into discrete packages takesan unrealistic view of corporate gov-ernance and calls into doubt a variety offamiliar, beneficial activities previouslyapproved by this Court and others .......... 9

iv

TABLE OF CONTENTS—Continued

Page

4. This case presents a particularly appro-priate vehicle for resolving these im-portant questions.................................... 13

II. THE INTERCIRCUIT DISAGREEMENTOVER THE STANDARD OF REVIEW OF“ECONOMIC SUBSTANCE” DETERMINA-TIONS IS AN IMPORTANT ISSUE FORAMERICA’S BUSINESS COMMUNITY....... 14

CONCLUSION ............................................................. 16

v

TABLE OF AUTHORITIES

CASES Page

ACM P’ship v. Commissioner, 157 F.3d 231 (3dCir. 1998)........................................................... 6

American Elec. Power Co., Inc. v. United States,326 F.3d 737 (6th Cir. 2003) ............................. 15

Aronson v. Lewis, 473 A.2d 805 (Del. 1984) ........ 4Black & Decker Corp. v. United States, 436 F.3d

431 (4th Cir. 2006) ............................................ 15Brehm v. Eisner, 746 A.2d 244 (Del. 2000) .......... 4Cooper Indus., Inc. v. Leatherman Tool Group,

Inc., 532 U.S. 424 (2001) .................................. 14Cottage Sav. Ass’nv. Commissioner, 499 U.S.

554 (1991).......................................................... 10Daily Income Fund, Inc v. Fox, 464 U.S. 523

(1984)................................................................. 3Dow Chem. Co. v. United States, 435 F.3d 594

(6th Cir. 2006) ................................................... 15Frank Lyon Co. v. United States, 435 U.S. 561

(1978)................................................................. 9Grutter v. Bollinger, 539 U.S. 306 (2003)............. 5Illinois Tool Works, Inc. v. Independent Ink, Inc.,

126 S.Ct. 1281 (2006)........................................ 4Jacobellis v. Ohio, 378 U.S. 184 (1964) ............... 6Keeler v. Commissioner, 243 F.3d 1212 (10th

Cir. 2001)........................................................... 15Kumho Tire Co. v. Carmichael, 536 U.S. 137

(1999)................................................................. 14Northern Indiana Pub. Serv. Co. v. Commis-

sioner, 115 F.3d 506 (7th Cir. 1997) ................. 11Rogers v. United States, 281 F.3d 1108 (10th Cir.

2002).................................................................. 6State Oil Co. v. Kahn, 522 U.S. 3 (1997) .............. 4Sutton v. United Airlines, Inc., 527 U.S. 471

(1999)................................................................. 4

vi

TABLE OF AUTHORITIES—Continued

Page

Texas Dep’t of Community Affairs v. Burdine,450 U.S. 248 (1981) .......................................... 4

TIFD III-E, Inc. v. United States, 459 F.3d 220(2d Cir. 2006) .................................................... 15

United Parcel Serv. of Am., Inc. v. Com-missioner, 254 F.3d 1014 (11th Cir. 2001)........ 15

Winn-Dixie Stores, Inc. v. Commissioner, 254F.3d 1313 (11th Cir. 2001) ................................ 15

STATUTORY AUTHORITIESU.C.C. Art. 1-301 .................................................. 4U.C.C. Art. 2-201(2).............................................. 4U.C.C. Art. 2-207(2).............................................. 411 U.S.C. §501 ...................................................... 4

OTHER AUTHORITIESKorb Acknowledges U.S. Supreme Court May

Need to Clarify Economic Substance, DailyTax Rep. (BNA) (Oct. 27, 2006) ....................... 6, 13

Joseph Bankman, The Economic SubstanceDoctrine, 74 S. Cal. L. Rev. 5 (2000)................ 6

Richard W. Duesenberg, The Business JudgmentRule and Shareholder Derivative Suits: A Viewfrom the Inside, 60 Wash U. L. Q. 311 (1982) .. 4, 5

Daniel R. Fischel & Michael Bradley, The Roleof Liability Rules and the Derivative Suit inCorporate Law: A Theoretical and EmpiricalAnalysis, 71 Cornell L. Rev. 261 (1986) ........... 5

David P. Hariton, Sorting Out the Tangle of Eco-nomic Substance, 52 Tax Law. 235 (1999) ....... 6

I.R.S. Pub. 583, Starting a Business and KeepingRecords, available at http://www.irs.gov/pub/irs-pdf/p583.pdf ................................................. 12

vii

TABLE OF AUTHORITIES—Continued

Page

I.R.S. Manual 31.1.1.1.3 (4), available athttp://www.irs.gov/irm/part31/ch01s01.html) .... 13

John F. Prusiecki, Coltec: A Case of MisdirectedAnalysis of Economic Substance, 112 TaxNotes 524 (Aug. 7, 2006) .................................. 9

Mark J. Silverman et al., The Economic Sub-stance Doctrine: Sorting Through the FederalCircuit’s “We Know It When We See It” Ruling in Coltec, Tax Executive 423 (Nov./Dec. 2006) .........................................................6, 9, 12

Sheryl Stratton, Government, Tax Bar DisagreeOver Impact of Coltec, 212 Tax Notes 1 (Nov.1, 2006).............................................................. 6

Sheryl Stratton, Korb Praises, PractitionersQuestion Enforcement Shift, 113 Tax Notes394 (Oct. 30, 2006)............................................ 13

Crystal Tandon & Sheryl Stratton, Korb, FormerIRS Officials Discuss Recent Shelter Cases,112 Tax Notes 1113 (Sept. 25, 2006)................ 10

U. S. Dep’tof Commerce, Small Bus. Adm.,2006 Performance and Accountability Report .. 13

IN THE

Supreme Court of the United States————

No. 06-659

————

COLTEC INDUSTRIES, INC.,Petitioner,

v.

UNITED STATES OF AMERICA,Respondent.

————On Petition for Writ of Certiorari to the

United States Court of Appealsfor the Federal Circuit

————BRIEF AMICI CURIAE OF THE NATIONAL

ASSOCIATION OF MANUFACTURERS ANDTHE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICAIN SUPPORT OF PETITIONER

————

INTEREST OF AMICI CURIAE 1

The National Association of Manufacturers (“NAM”) is the nation’s largest industrial trade association, representing small and large manufacturers in every industrial sector andin all 50 states. The NAM’s mission is to enhance the

1 Pursuant to Supreme Court Rule 37.6, amici state that the brief wasauthored in its entirety by amici curiae and their counsel. No monetarycontribution toward the preparation or submission of this brief was madeby any person other than amici curiae, their members and their counsel.By letters filed with the Clerk of the Court, petitioner and respondent haveconsented to the filing of this brief.

2

competitiveness of manufacturers by shaping a legislative andregulatory environment conducive to U.S. economic growthand to increase understanding among policymakers, the mediaand the general public about the vital role of manufacturing inAmerica’s economic future and living standards. In supportof this mission, the NAM regularly files briefs amicus curiaein this Court and other courts.

The Chamber of Commerce of the United States of America(“Chamber”) is the nation’s largest federation of business companies and associations. It represents an underlyingmembership of more than three million business, trade andprofessional organizations of every size, sector and geo-graphic region of the country. One of the Chamber’s primary missions is to represent the interests of its members by filingamicus curiae briefs in cases involving issues of nationalimportance to American business.

SUMMARY OF THE ARGUMENT

This Court should grant certiorari for two reasons, inaddition to those given in Coltec’s petition.

First, not only does the decision below fuel the intercircuitdisagreements over the economic substance doctrine, theFederal Circuit’s entire approach jeopardizes important prin-ciples of judicial deference to business judgment. Suchdeference reflects both a desire to facilitate efficient capitalallocation and an awareness about the relative expertise ofgovernment officials and businesspeople. The decision belowundermines this deep and important tradition of deference.It sows confusion over the relationship between the eco-nomic substance doctrine and other judicially created taxdoctrines, virtually invites unpredictable judicial second-guessing of businesspersons’ decisions and takes a wholly unrealistic view of business planning. Moreover, in light ofthe IRS’s very public pronouncements about how it intends

3

to exploit the decision below, this Court’s prompt inter-vention is necessary.

Second, the intercircuit disagreement over the standard ofappellate review of “economic substance” determinations also presents an important issue for the business world. ThisCourt routinely has granted certiorari to resolve disagree-ments over the proper standard of review and, thereby, toprovide a uniform nationwide rule. In the specific context ofeconomic substance determinations, the standard of review isespecially important. The plenary review required by thecourt below exacerbates the lack of deference and effectivelyprovides the Government an added and inappropriate tool inits litigation against American businesses.

ARGUMENT

I. THE DECISION BELOW THWARTS LONG-STANDING AND IMPORTANT PRINCIPLESOF JUDICIAL DEFERENCE TO BUSINESSJUDGMENT.

A. American Company Law Reflects A TraditionOf Deference To Business Judgment.

It is a “basic principle of corporate governance that thedecisions of a corporation . . . should be made by the board ofdirectors or a majority of the shareholders.” Daily IncomeFund, Inc v. Fox, 464 U.S. 523, 530 (1984). Stripped to itsessence, this case concerns whether courts will defer to thosejudgments or second-guess them by employing a whollyunpredictable test.

Several legal doctrines exemplify a long tradition ofjudicial deference to business judgment. Perhaps the mostfamiliar is the business judgment rule in corporate law, whichcreates “a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in goodfaith and in the honest belief that the action taken was in the

4

best interests of the company.” Aronson v. Lewis, 473 A.2d805, 812 (Del. 1984). Accordingly, good-faith businessdecisions “will not be disturbed if they can be attributed to any rational business purpose.” Brehm v. Eisner, 746 A.2d244, 264 & n. 65 (Del. 2000).

Outside the familiar field of corporate governance, otherexamples abound. For example, in employment law, courtsdefer to the legitimate business explanations for an employ-er’s treatment of a present or prospective employee. See, e.g.,Sutton v. United Airlines, Inc., 527 U.S. 471, 493-494 (1999);Texas Dep’t of Community Affairs v. Burdine, 450 U.S. 248(1981). In commercial law, courts do not question the certainchoices made in contracts “between merchants.” See, e.g.,U.C.C. Art. 1-301, 2-201(2), 2-207(2). An entire chapterof the Bankruptcy Code is dedicated to the proposition thatcompanies experiencing difficult—but ultimately surmount-able—financial hardship are better left in the “possession” of the debtor rather than the government. See 11 U.S.C. §§501et. seq. In antitrust law, this Court’s shift away from per serules and toward a “rule of reason” analysis reflects greater judicial acceptance of business judgment about the economicrationale for a transaction. See, e.g., Illinois Tool Works, Inc.v. Independent Ink, Inc., 126 S.Ct. 1281 (2006); State Oil Co.v. Kahn, 522 U.S. 3 (1997).

These deferential doctrines reflect two underlying prin-ciples. First, excessive governmental intrusion into businessaffairs chills commercial activity. See Richard W. Duesen-berg, The Business Judgment Rule and Shareholder Deriv-ative Suits: A View from the Inside, 60 Wash U. L. Q. 311,314 (1982). Governmental scrutiny of good-faith businessactivity increases its costs. Furthermore, if companies per-ceive that such scrutiny is likely, they may choose to abandonan undertaking altogether rather than risk costly and time-consuming governmental second-guessing.

5

Second, business executives are better suited to determinewhich transactions serve a company’s interests. Cf. Grutter v.Bollinger, 539 U.S. 306, 328 (2003) (deferring to university’s determination that diversity was “essential to its educational mission”). Government officials do not face the same choices as American businesspersons. See Daniel R. Fischel &Michael Bradley, The Role of Liability Rules and theDerivative Suit in Corporate Law: A Theoretical andEmpirical Analysis, 71 Cornell L. Rev. 261, 273 (1986) (“A manager who makes bad business decisions is likely to havehis wealth reduced or be fired; judges who make bad businessdecisions will continue in office with the same salary asbefore.”); Duesenberg, 60 Wash. U. L. Q. at 314. They are not accountable to shareholders. They do not compete in amarketplace. Under immunity doctrines, rarely must theyworry about liability for their actions. By contrast each ofthese considerations—shareholder satisfaction, market com-petition and liability management—is of paramount impor-tance to the American business executive.

B. The Federal Circuit’s Economic Substance Analysis Undercuts This Tradition ofDeference.

In three respects, the decision below undercuts the above-described tradition of deference in American business law.

1. The decision below sows confusion over themeaning of various judicially created doc-trines governing the availability of deductionsand credits under the Internal Revenue Code.

A taxpayer who satisfies all of the technical requirementsfor a deduction or credit under the Internal Revenue Codedoes not necessarily receive that benefit. Instead, not onlymust the taxpayer satisfy the requirements set forth byCongress, it must also satisfy the requirements of certainjudicially created doctrines such as the “substance over form”

6

doctrine, the sham-transaction doctrine, the business purposerequirement and the economic substance doctrine. SeeJoseph Bankman, The Economic Substance Doctrine, 74 S.Cal. L. Rev. 5, 12 (2000).

Even assuming their validity in a post-Erie world, thesejudicially created doctrines at least should be clear. Thedecision below deprives these doctrines of that essentialclarity. Whereas some courts have treated doctrines such as“economic substance” and “substance over form” as separate concepts with distinct and identifiable requirements, see, e.g.,Rogers v. United States, 281 F.3d 1108, 1113-16 (10th Cir.2002), the court below treats them almost interchangeably,akin to some sort of general “equity” exception under the Internal Revenue Code. (Pet. App. 18a).

This latter approach has sowed confusion within the busi-ness community. See generally David P. Hariton, SortingOut the Tangle of Economic Substance, 52 Tax Law. 235,241 (1999) (“Much confusion has been engendered, however, by the fact that the courts have sometimes failed to addresslack of economic substance as a requirement separate andapart from lack of business purpose.”). It deprives the busi-ness community of any clarity over the meaning of these judi-cially created doctrines and their requirements. Tax advisorscannot realistically offer a confident opinion about the taxtreatment of a particular transaction, and, ultimately, thebusinesspersons advised by them lack the confidence about atransaction’s consequences for the company’s bottom line.

As one judge has observed, the approach exemplified bythe Federal Circuit’s decision amounts to little more than a “smell test” under which courts can deny favorable tax treatment to transactions that they just don’t like or, worse, don’t understand. ACM P’ship v. Commissioner, 157 F.3d231, 265 (3d Cir. 1998) (McKee, J., dissenting). Just as suchamorphous tests chill desirable speech in the FirstAmendment context, cf. Jacobellis v. Ohio, 378 U.S. 184, 197

7

(1964) (Stewart, J., concurring), so too does the FederalCircuit’s “I know it when I see it” test risk chilling corporateactions that may be in a company’s best interest, see infraPart I.B.3. See Mark J. Silverman et al., The EconomicSubstance Doctrine: Sorting Through the Federal Circuit’s “We Know It When We See It” Ruling in Coltec, TaxExecutive 423 (Nov.-Dec. 2006). Rather than risk the ex-pense and burden of litigating a transaction, a company maysimply abandon it.

The typical duration of major business tax litigation makesthe chilling effects of this “smell test” especially nefarious. In this case, for example, the appellate court issued its deci-sion nearly ten years after Coltec reported the capital lossgiving rise to the contested deduction. (Pet. App. 1a). TheFederal Circuit’s “equitable” approach thereby gives courts virtually unbounded latitude to apply the particular economicor political theories in vogue—years, or even decades, afterthe relevant business decisions were made.

At the threshold, therefore, this Court’s intervention is necessary to decide the important and unresolved issue—further unsettled by the decision below—about the common-law power of courts to deny favorable tax treatment to trans-actions that satisfy the requirements set forth by Congress inthe Internal Revenue Code.

2. The lower court’s standard for economic substance determinations virtually guaran-tees judicial second-guessing of good-faithbusiness judgments.

Coltec’s petition ably demonstrates the intercircuit conflict over the proper test for economic substance determinations, aconflict that both commentators and the IRS’s chief counsel have acknowledged. Sheryl Stratton, Government, Tax BarDisagree Over Impact of Coltec, 212 Tax Notes 1 (Nov. 1,2006); Korb Acknowledges U.S. Supreme Court May Need to

8

Clarify Economic Substance, Daily Tax Rep. (BNA) (Oct. 27,2006). While that confusion itself supplies a reason forgranting certiorari, the importance of the issue provides anadditional reason justifying review.

The upshot of the Federal Circuit’s “objective” test is thatit simply ignores—indeed renders legally irrelevant—theactual reasons motivating a business executive’s decision toundertake a transaction. Here is the critical portion of theopinion:

[E]conomic substance is measured from an objective,reasonable viewpoint, not by the subjective views of thetaxpayer’s corporate officers. (Pet. App. 31a).

This judicial disdain for the economic judgments of Americanbusiness executives undermines the above-described traditionof deference and carries all the perils of such judicial second-guessing—both the drag on economic activity and the risk oferror. See supra Part I.A. In its opinion, the Federal Circuitquoted at length from the testimony of Coltec executivesrecounting the multiple reasons why they chose to create theGarrison subsidiary—to signal to the investment communitythat Coltec had a grip on its potential asbestos liabilities, tofocus management and administration of these liabilities in asingle unit, to reduce the risk of veil piercing claims againstthe parent company, and to make the company a potentiallyattractive target for a corporate merger. (Pet. App. 28a-29a,31a). The Federal Circuit then declared that these actualsubjective judgments are wholly irrelevant to its analysis.(Pet. App. 31a). Having cast the actual motives to oneside, the only option left to a court under the Federal Circuit’s test is to undertake its own fresh economic analysis of thetransaction.

That is precisely what the Federal Circuit did here. Atbottom, the Court’s opinion rests on the belief that Colteccould have accomplished its desired business objective ina different (and less economically beneficial) way, so its

9

chosen course must lack economic substance. (Pet. App.33a). Not only does this judicial second-guessing conflictwith the deferential approach taken by this Court in FrankLyon Co. v. United States, 435 U.S. 561 (1978), see Pet. at18-19, it also is fraught with risks. Apart from the lack ofdeference, there is a real risk that the court might get theeconomic analysis wrong. As a matter of tax law, severalcritics have demonstrated that the Federal Circuit committedjust such an error in this case: it failed to explain howColtec’s very real contingent liabilities ultimately would be treated under the Internal Revenue Code. See generallyJohn F. Prusiecki, Coltec: A Case of Misdirected Analysis ofEconomic Substance, 112 Tax Notes 524 (Aug. 7, 2006)(criticizing Federal Circuit’s economic analysis); Silverman, Tax Executive at 432 (same). As a matter of corporategovernance, the success of the Coltec executives’ strategy betrays the flaws in the Federal Circuit’s opinion: a major company ultimately bought Coltec after it had implementedthe very plan criticized by the court below. (Pet. App. 59a).

3. The Federal Circuit’s division of a trans-action into discrete packages takes an unrea-listic view of corporate governance and callsinto doubt a variety of familiar, beneficialactivities previously approved by this Courtand others.

The other important—and erroneous—feature of the Fed-eral Circuit’s economic substance analysis is its division of the transaction into discrete steps, analyzing each separatelyrather than the transaction as a whole. This approach presentsseveral problems.

For one thing, it takes a wholly unrealistic view of businessplanning. As any corporate executive or corporate counselknows, transactions may proceed in multiple steps, but ulti-mately a unified corporate strategy connects them. Almostinvariably, some step will be motivated in part—if not

10

wholly—by the tax consequences. See Prusiecki, 112 TaxNotes at 524 (“[A]ny transaction that involves any tax planning at all has one or more aspects or elements that aretax motivated and serve no nontax purposes.”); Silverman, Tax Executive at 436 (“The potentially expansive reach of theeconomic substance test articulated in [the decision below]combined with the application of that test on a step-by-stepbasis raises questions with respect to virtually all tax planning. . . .”). By separating the transaction into discrete parts, theFederal Circuit’s decision marks, according to several tax practitioners, a “troubling shift” that ignores the realities of business planning. Crystal Tandon & Sheryl Stratton, Korb,Former IRS Officials Discuss Recent Shelter Cases, 112 TaxNotes 1113 (Sept. 25, 2006).

For another thing, the logic of the decision below calls intodoubt a variety of business actions motivated by a mixture oftax and non-tax considerations, including ones previouslyapproved by this Court and others:

Mortgage Swaps: In Cottage Savings Association v.Commissioner, this Court considered the tax treatmentof mortgage swaps. 499 U.S. 554 (1991). Thesetransactions were precipitated by the declining valueof long-term, low-interest mortgages held by savingsand loan institutions. Because federal banking laws atthat time allowed them to swap mortgages withouttaking losses for regulatory accounting purposes,financial institutions swapped their mortgages in orderto claim tax losses reflecting the difference betweenthe high face value of the mortgages and their low fairmarket value at the time of the swaps. This Courtheld that the swaps qualified for the deduction andrejected the Government’s argument to disallow them under the economic substance doctrine. Id. at 567-68.The Federal Circuit, however, would have disallowedthe deduction. From an objective economic perspec-tive, the swap worked no difference in the company’s balance sheet—the original bundle of mortgages was

11“substantially identical” to the swapped ones and had the same fair market value. Id. at 557. Thus, therewas no objective economic explanation apart from theresulting tax benefits. The Federal Circuit’s rule might well have deterred such swaps altogether, forc-ing financial institutions to carry large losses on theirbalance sheets without the opportunity to realize thoselosses.

Foreign Lending Subsidiaries and NIPSCO: In the1980’s, American companies encountered difficulty raising capital domestically due to high interest rates.To ameliorate this problem, they established foreignsubsidiaries which could raise money from foreignmarkets with lower interest rates and then lend thatmoney to the domestic parent, with a repaymentschedule tied to the foreign subsidiaries’ obligations to its bond holders. The situs of those foreign sub-sidiaries was closely tied to the tax consequences: bylocating the foreign subsidiary in a country that hada bilateral tax treaty with the United States, thedomestic parent could utilize provisions relieving it ofthe obligation to pay withholding taxes on interestpayments to the foreign subsidiary. The Seventh Cir-cuit expressly approved this design (and the resultingfavorable tax benefits), see Northern Indiana Pub.Serv. Co. (“NIPSCO”) v. Commissioner, 115 F.3d506 (1997), but it would fail under the FederalCircuit’s rule. Under the logic of the Federal Circuit’s decision, the choice to establish the foreign subsidiarywould be decoupled from the choice where to locateit. While the establishment of the foreign subsidi-ary might have a non-tax economic explanation, thechoice of location would not. It would be solelydriven by the tax benefits inuring to the domesticparent from the tax treaty. Thus, if it had analyzedthe facts of NIPSCO, the Federal Circuit would havedisallowed the withholding benefit and, ultimately,increased the cost of capital to the domestic parent.

12 Choice of Corporate Form: Businesses may take a

variety of forms ranging from sole proprietorships topartnerships to corporations. While non-tax consid-erations may influence part of the decision, other partsof the decision may be influenced entirely by taxconsiderations. For example, a business may chooseto adopt a corporate form, rather than a partnership, totake advantage of liability limitations. Yet tax con-siderations may drive entirely the choice betweenforms of corporation. Indeed, one of the IRS’s own publications recognizes that “[a]n eligible domesticcorporation can avoid double taxation (once to thecorporation and again to the shareholders) by elect-ing to be treated as an S-corporation.” I.R.S. Pub.583, Starting a Business and Keeping Records at 3,available at http://www.irs.gov/pub/irs-pdf/p583.pdf(emphasis added). Yet under the Federal Circuit’s logic, the IRS would be giving bad advice: A courtwould have to bifurcate the “transaction” into two parts—(1) the choice to incorporate and (2) the choiceof corporate form. While the former would have anobjective economic justification, the latter would not.Consequently, a company opting for S-corporationstatus would not receive the favorable tax benefit.

In sum, each of these examples demonstrates how theFederal Circuit’s approach—disaggregating transactions intoseparate steps and requiring an “objective non-tax” economic explanation for the step giving rise to the tax benefit—issimply incompatible with existing precedent and, if uncor-rected, could have a damaging effect on economic activity.See generally Silverman, Tax Executive at 432-36 (describ-ing several additional transactions whose tax treatment ispotentially affected by Federal Circuit’s analysis).

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4. This case presents a particularly appropri-ate vehicle for resolving these importantquestions.

For two reasons, this Court needs to correct promptly theflawed economic substance analysis in the decision below.

First, the Federal Circuit is a court of nationwide juris-diction. Unlike a regional appellate court, the Federal Cir-cuit’s decision has the potential to cast a wider precedential net in any case governed by its precedents. See Stratton, 212Tax Notes 1.

Second, the IRS itself has signaled that it intends to relyheavily on that decision in its tax litigation. Just recently, theIRS’s chief counsel heralded the case as one whose principles “will be cited 20 years from now” and will be of “wide use” to the IRS. Sheryl Stratton, Korb Praises, PractitionersQuestion Enforcement Shift, 113 Tax Notes 394 (Oct. 30,2006); Korb Acknowledges U.S. Supreme Court May Need toClarify Economic Substance, Daily Tax Rep. (BNA) (Oct. 27,2006). In light of the IRS’s expected use of this decision, timely correction is imperative.

Prompt correction is particularly important given the natureof business planning. In many cases, taxpayers reachsettlements with the IRS before a case ever reaches trial(much less final judgment). See I.R.S. Manual 31.1.1.1.3 (4),available at http://www.irs.gov/irm/part31/ch01s01. html).Moreover, risk-averse companies may well abandon trans-actions altogether for fear of running afoul of the FederalCircuit’s “smell” test and risking litigation with the IRS. While large companies perhaps can litigate these cases tojudgment and through appeal, smaller businesses, which formthe backbone of the American economy, do not have theluxury—or the legal budgets—to afford such a course. SeeU. S. Dep’tof Commerce, Small Bus. Adm., 2006 Per-formance and Accountability Report, Executive Summary at

14

4 (noting that small businesses represent 99.7% of allemployer firms, employ half of all private sector employeesand have generated 60-80% of net new jobs annually over thelast decade), available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/03_summary.pdf.).

Thus, in addition to the reasons given in Coltec’s petition, this Court should grant certiorari to address the importantissues raised by—and to correct the deep flaws contained in—the Federal Circuit’s economic substance analysis.

II. THE INTERCIRCUIT DISAGREEMENT OVERTHE STANDARD OF REVIEW OF “ECO-NOMIC SUBSTANCE” DETERMINATIONS IS AN IMPORTANT ISSUE FOR AMERICA’S BUSINESS COMMUNITY.

Standards of review are important. They determine thelevel of deference that an appellate tribunal affords to trialcourts. Thus, this Court has routinely granted review in casesabout the proper standard of review. These include ones ofspecial importance to the business community. See, e.g.,Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532U.S. 424 (2001); Kumho Tire Co., Ltd. v. Carmichael, 526U.S. 137 (1999).

This case too presents a question about the standard ofreview warranting certiorari. Amici agree with Coltec thatcertiorari is warranted to resolve a mature split among thefederal appellate courts on the issue. (Pet. 14-15). Addi-tionally, the issue is important to the business community fortwo reasons.

First, appellate courts have been aggressive in making denovo determinations that transactions lack economic sub-stance (or otherwise fail under similar doctrines) despite thefact-intensive nature of that inquiry. In several recent cases,including the decision below, the de novo standard has been

15

utilized to upset favorable rulings that taxpaying corporationsobtained at the trial level. See, e.g., TIFD III-E, Inc. v. UnitedStates, 459 F.3d 220, 230-31 (2d Cir. 2006); Dow Chem. Co.,v. United States, 435 F.3d 594 (6th Cir. 2006), petition forcertiorari filed, No. 06-478 (Oct. 4, 2006). By contrast, inrecent cases when the taxpayers lost in the trial court, plenaryreview of an “economic substance” or similar determination generally did not benefit them on appeal—the appellate courtfound in the Government’s favor. See, e.g., American Elec.Power Co., Inc. v. United States, 326 F.3d 737, 741 (6thCir. 2003); Winn-Dixie Stores, Inc. v. Commissioner, 254F.3d 1313, 1315 (11th Cir. 2001); Keeler v. Commissioner,243 F.3d 1212, 1217 (10th Cir. 2001). But see United ParcelServ. of Am., Inc. v. Commissioner, 254 F.3d 1014, 1017(11th Cir. 2001). The consistent tendency of appellate courts—farther removed from the evidence and testimony—to findno economic substance in business transactions suggests thatthe standard of review is not neutral in operation.

Second, economic substance cases are increasingly reach-ing the federal appellate courts. As late as the 1990’s, commentators bemoaned the paucity of reported decisions onthe doctrine. See Hariton, 52 Tax Law. 235. Since 2000,however, there have been thirteen reported appellate deci-sions on the subject, including four in the last year alone. SeePet. App. 1a-33a; TIFD III-E, Inc., 459 F.3d 220; Black &Decker Corp. v. United States, 436 F.3d 431 (4th Cir. 2006);Dow Chem. Co., 435 F.3d 594. Thus, the issue can only beexpected to grow in importance.

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CONCLUSION

For the foregoing reasons, the Court should grant thepetition for a writ of certiorari.

Respectfully submitted,

JAN S. AMUNDSONSenior Vice President &

General CounselQUENTIN RIEGELVice President &

Deputy General CounselNATIONAL ASSOCIATION OF

MANUFACTURERS1331 Pennsylvania Avenue N.W.Washington, D.C. 20004-1790(202) 637-3000

ROBIN S. CONRADAMAR D. SARWALNATIONAL CHAMBER

LITIGATION CENTER, INC.1615 H Street, N.W.Washington, D.C. 20062(202) 463-5337

PETER B. RUTLEDGECounsel of Record

127 Moncure DriveAlexandria, VA 22314(202) 319-5140

Counsel for Amici CuriaeNational Association ofManufacturers and theChamber of Commerce ofthe United States of America

January 12, 2007